Want to know what is Credit Insurance? Simply, Credit Insurance provides your business with protection against the failure of your customer to pay their trade credit debts – i.e. money that is rightfully yours. Such a debt can arise as a result of your customer becoming insolvent (i.e. going bust) or because your customer simply fails to pay within an agreed credit period.
The protection covers as standard goods sold and delivered but can be tailored to cover many other risks such as pre-despatch work-in-progress and binding contracts.
As well as ‘commercial’ risk, credit insurance can also protect against ‘political’ risk for those trading abroad. Examples include war or civil war, cancellation of the contract by the government of your customer’s country, or governmental regulations which prevent the export or import of goods.
Credit insurance can indemnify you against a complete spectrum of perils such as inconvertibility, contract frustration, contract cancellation, and export and import restriction problems.
Credit Insurance – Background
If a business fails to collect money from invoiced debtors on time (or at all), the following effects are likely to happen:
a) Problems with cash flow – A business may find it difficult to pay their own debts, purchase essential materials and even pay staff wages!
b) Self-financing – A business may have to finance the loss or late payment of a debt from their own turnover. This may mean a business with a high profit margin may have to increase their turnover significantly to make up for even the smallest amount of money.
c) Reduced competitiveness – A business suffering from bad debts may have no choice but to reduce the amount of credit they offer making them less competitive.
d) Collection & legal costs – If a business decides to take action to recover debts, this can often result in collection fees or solicitor fees. Alternatively, if the business decides to recover the debt themselves, the process can be timely.
Generally, if you offer credit terms to your invoiced customers you will increase your sales (the problem is you will also potentially increase your bad debt).
Trade credit insurance is designed to cover, usually for twelve months, a supplier of goods or a service from bad debt arising out of an act of insolvency (see Insolvency section) and some trade credit insurance policies offer protracted default i.e. where they simply refuse to pay. All of your invoice based customers can be covered, or just your ‘top’ customers (definitely not just your worst customers!)
The trade credit insurance policy works by individual credit limits attributed to your customers. The limits are pre-set, and you can trade within the credit limit throughout the year without further reference to the insurer. You can request an increase in the credit limit at any time.
Trade Credit Insurance premiums may be paid in one payment but many insurers offer monthly payment, some interest free.
Many unforeseen and disruptive circumstances can appear in the world today. As we have seen of late, this is not confined to third world countries. War, political unrest, military coup d’état, fraud, and all the problems any business in the world can suffer makes export sales without trade credit insurance business suicide. So, when asked by our clients What is Credit Insurance? we say it’s now a necessary cover for trading in today’s world.
Get in touch for more information or obtain a no-obligation quote for Credit Insurance.